economics of storage for grid applications · the economics of storage for grid applications 1st...

© 2018 Aurora Energy Research Limited. All rights reserved.08/10/2019©

The economics of storage for grid applications

1st October 2019

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2. State of the market: storage in GB

3. The economics of storage in GB

4. Conclusions

Agenda

1. The need for storage – EU context

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Achieving net zero emissions in the energy sector requires massive change across many areas of the economy

Energy efficiency

Carbon sequestration

Storage and grid investment

Wind and solar

Fuel switching: electricity, H2

Fossil fuel write-downs

▪ Efficiencies are the most economical way of reducing emissions

▪ Rate of energy demand growth likely to slow globally

▪ Most economical zero-emissions power technologies to build

▪ Will need to provide most generation by 2050

▪ Batteries help address lower inertia and higher intermittency

▪ Rising demand and distributed generation drive grid investment needs

▪ Most energy use will have to be from clean electricity

▪ This implies switching most industry, transport, heating to electricity

▪ Hard-to-electrify sectors to switch to H2 or biogas

▪ Gas plants with CCS would provide dispatchable generation

▪ Residual emissions require other forms of sequestration (e.g. forests)

▪ Globally, some coal plants will be “stranded”

▪ Oil production will eventually need to be reduced to much lower levels

Focus

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Achieving net zero in the EU by 2050 could mean tripling capacity, with most additions from solar and wind

Source: Aurora Energy Research

1: Mostly biomass; also includes geothermal. 2: We assume energy demand is 80% electrified by 2050.

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Battery Coal - CCS

Other renewables1

Solar

Wind

Gas - CCS Nuclear

Gas Coal

Oil

Hydro

EU installed capacityTW Growth in capacity

reflects:

▪ electrification of transport, heating and industry2

▪ lower load factors for renewables compared with thermal

Solar and wind account for 1TW each by 2050

Most gas generation replaced by gas CCS; residual emissions must be mitigated by other carbon sequestration

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Renewables growth erodes baseload load factors; flexible technologies are better positioned to make up demand

Sources: Aurora Energy Research

1. Transmission demand

Residual demand mainly met by uninterrupted baseload generation

Residual demand mainly met by flexible generation

Illustrative power demand in two typical weeks, GW

2019 2030

Residual demand1 Solar Wind Nuclear

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Meeting power sector emission targets requires investments of up to $60bn per year across wind, solar and batteries


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53

63 6360

5550

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Battery (replacement)

Battery (new build) Wind (new build)

Wind (replacement) Solar (replacement)

Solar (new build)

EU CAPEX investment in wind, solar and batteries$bn, real 2018

Spending is driven by capacity deployed and by capital costs

We assume costs per kW will continue to fall rapidly, in line with historic learning rates

Annual spend on storage technologies could reach up to $10bn per year

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4. Conclusions

Agenda


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0

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800

1,000

2022/232020/21

973

2018/19 2019/20 2021/22 Total by 2022/23

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521

408

1 GW of batteries have already been contracted to come online by 2021, with more expected in the T-3 capacity auction

Sources: National Grid

1. Capacity winning contracts in both T-1 and T-4 auctions is shown for the relevant T-4 auction. 2. With effect as of 2021/22

▪ 973 MW of nameplate battery capacity has been contracted for deployment by 2021/22 through the CM

– Capacities have primarily been 0.5-1 hour batteries targeting Frequency Response (FFR and EFR) business cases

▪ 1.34 GW of batteries prequalified for the suspended T-4 2022/2023 CM auction (to be postponed as a T-3

auction, including re-run of prequalification), with majority greater than 1h durations

CM-procured battery capacity1

MW-nameplate

1.5 hour

1 hour

0.5 hour

Unknown

CM battery sites

500

CapacityMW

PendingT-3Auction

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456

1,223

743

2017

20

2016

8439

100 155

2018

560

1,422

937

99

Despite strong pipeline of battery projects in development, it is unlikely that all 3.5 GW will deliver

Battery Project Pipeline1

1. Renewable Energy Planning Database Q1 2019

▪ Of the 145 battery projects (~3 GW) currently granted

planning permission but not yet built, most (~2 GW) have no

CM contract

▪ The surge in project planning approvals in 2017 was before

the steep decline in FFR prices and the new reduced storage

capacity market de-ratings

▪ Colocation business models, in particular on existing thermal

sites, have seen continually increasing interest as a means of

future-proofing against future volatility

Colocated with Fossil Fuel Plants

Standalone

Colocated with Renewables

Battery Projects with Planning ApprovalMW-nameplate

Year Approved

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Historic

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2010 20202015 2025 2030 2035 2040

Li-ion cell costs continue to fall, with technological advancements largely driven by EV battery research

Sources: Aurora Energy Research, BNEF, Nature climate change, Lazard, Woodbank communications

1. Based on a 1-hour duration battery. 2. Includes quoted prices for Nissan and Tesla

Li-ion battery cell costs, 2018, £/kWh1 Historic costs: Aurora scenarios:

Market leaders2

Nature climate change

BNEF

Lazard

H1 Fast

H1 Central

H2 Central

H1 Slow

-5%

Rate of cost reduction2019-2030 CAGR

-3%

-7%

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4. Conclusions

Agenda


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Five categories of revenues are available for batteries


Delivery

Years Hours Minutes Seconds

Ancillary services

▪ Maintains operational grid requirements through

response ranging from sub-second to hours

▪ Contracted on monthly-yearly basis

Balancing Mechanism

▪ Ensures balance is maintained in the power system in

real time

▪ Contracted between gate closure and delivery

Wholesale Market

▪ Market to buy and

sell power to meet

demand in each

settlement period

(i.e. half-hour)

▪ Contracted from

years ahead to

hour ahead

Capacity Market

▪ Ensures sufficient

reliable capacity and

long-term security of

supply

▪ Contracted yearly for

lengths of 1-15 years

▪ Suspended pending formal

investigation from the

European Commission

WM BM

AS

CM

Embedded and Behind-the-meter (BTM) BenefitsEB

▪ Transmission Network Use of System (TNUoS): For relieving peak transmission network demand

▪ Balancing Service Use of System (BSUoS): For reducing balancing charges

▪ Generator Distribution Use of System (GDUoS): For relieving peak distribution network demand

Time prior to delivery

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A cascade of decisions on revenues define a business model “revenue stack”

Years Months Hours Minutes

DeliveryTime prior to delivery

Should you commit to ancillary services contracts?

EFR

STOR

FFR - Dynamic

FFR - Static

Fast Reserve

Wholesale (WM)

Should you lock in sales on day-ahead/week-ahead prices?

Balancing (BM)Capacity (CM)

[G]DUoS

BSUoS

CM charge

Triads

Should you invest? If so, where on the grid?

Should you offer last minute balancing?

Decisions are interrelated. Each decision must anticipate the impact on future decisions

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There are three main battery storage commercial models being deployed successfully right now

Frequency response

▪ Securing National Grid FFR contracts through monthly tenders

1

Energy arbitrage

▪ Active trading across the wholesale and balancing markets

2

Solar co-location

▪ Paired with a solar farm, but otherwise in frequency response or energy arbitrage

3

FOCUS

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The energy arbitrage model trades real time across the wholesale and balancing markets


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Wholesale price

Battery (dis)charging in Wholesale

Battery (dis)charging in Balancing

Balancing price

The battery may miss opportunities of high prices due to imperfect foresight and state of charge limitations

Battery dispatchMW

Power price£/MWh

Left axis Right axis

Half hours

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Understanding battery energy arbitrage is complex, and five practical factors diminish margins


Value drivers of storage:

▪ Efficiency loss – loss from >100% charge/ discharge efficiency conversion of batteries

▪ Duration – batteries may take 1-4hrs to charge and therefore cannot capture 5min price peaks

▪ Predictability – Aurora analysis indicates that even AI-optimised battery dispatch programs capture ~75% of available value

▪ Degradation –amortisation of battery over each cycle over its warranty supported number of cycles

▪ Spreads – final value gleaned from daily spread

Example erosion of value in daily arbitrage, Index of 100

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Example price spread in wholesale market,EUR/MWh

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Reductions to embedded benefits and FFR prices mean 2h batteries focused on load shifting become favourable


*Includes annualised capex and fixed costs. Capex is annualised over 15, 12 and 10 years for 2h, 1h and 0.5h batteries respectively at discount rate of 11%.

Annualised costs (0.5h)*

Annualised costs (2h)*

Annualised costs (1h)*

FFR Dynamic (0.5h)

Energy arbitrage (1h)

Energy arbitrage (2h)

Battery (Li-ion) CapacityAnnualised capex

Fixed cost

Wholesale

Balancing

Ancillary services (FFR/Fast Reserve/STOR)

Embedded benefits

18.0 1.5

Gross margins across business modelsAverage between 2022-2030, £’000/MWPartially Redacted

Market sizeGW

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4. Conclusions

Agenda


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Key takeaways on the economics of storage for grid applications


Across the EU, around 300 GW of battery capacity will be required by 2050

The growth of batteries in the UK has accelerated over the last few years, but recent policy and market changes cast doubt on the economics of batteries

This battery buildout will require up to $10 billion in new build and replacement CAPEX per year

Market and policies need to evolve to support the growth of storage assets that can provide flexibility to the system and support the economics of renewables

Grid-scale storage will be critical in the transition to a net zero power system

There are various commercial models being deployed for batteries in the GB market, but as the market transitions to higher renewable shares, energy arbitrage will play a key role in supporting the economics of new assets

The energy arbitrage model is inherently risky and uncertain, which limits the pool of equity and debt investors able to support the growth required

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Recent policy developments have depressed the commercial case for energy storage…

Capacity Market revision of de-rating factors

Reduction in Capacity Market revenues

Embedded benefits reduction (Triads, Capacity Market levy)

Reduction in embedded benefits revenues

Capacity Market suspensionUncertainty in Capacity Market payments

Targeted Charging ReviewPotential loss of the BSUoS embedded benefit

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…although there are also encouraging policy changes

Battery friendly reforms to Balancing Mechanism (e.g. PAR1, Distributed Resource Desk, TERRE)

Lower cost of participation in the Balancing Mechanism

Introduction of Local Flexibility Markets by DNOs

New revenue stream available

Net zero emissions target set for 2050

Need for zero-carbon flexibility to complement additional wind and solar

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economics of storage for grid applications · the economics of storage for grid applications 1st...

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